The Corporate Transparency Act (the “CTA”), a set of new regulations being implemented by the Financial Crimes Enforcement Network (“FinCEN”), requires entities newly formed or registered to do business in the United States on or after January 1, 2024 (subject to certain exemptions) to submit a report declaring beneficial ownership information within 90 days of such formation or registration. Entities that were formed or registered to do business in the U.S. prior to January 1, 2024, have one year, until January 1, 2025, within which to submit a report. Currently, there are no extensions available. Reporting violations can lead both to civil and criminal penalties.
Background
The CTA was included as part of the National Defense Authorization Act that was passed by Congress in January 2021. It imposes new reporting and compliance obligations on certain business entities (“Reporting Companies”) as part of the U.S. government’s efforts to promote transparency and limit opportunities for money laundering and other criminal activity committed through shell companies or other opaque ownership structures. The CTA will create a federal database with beneficial ownership information about applicable entities, including corporations, limited partnerships, and limited liability companies. FinCEN is a unit of the U.S. Department of the Treasury.
Who is Affected
The CTA covers both domestic and foreign entities. Domestic Reporting Companies include corporations, limited liability companies, limited partnerships, and any other entity formed by filing a document with a U.S. state’s secretary of state. Foreign Reporting Companies include corporations, limited companies, and other entities formed under non-U.S. law that are registered to do business in any state of the United States.
The CTA currently provides twenty-three exemptions (see below) under which a company will not be considered a Reporting Company and will therefore not be required to file a beneficial ownership report with FinCEN. Importantly, public companies, certain private investment funds, broker/dealers, registered investment companies, registered investment advisers, venture capital fund advisers and other large and already regulated companies will be exempt. We expect that smaller operating businesses, holding companies, family limited liability companies (including single-member LLCs), and entities formed for purposes of acquisitions, joint ventures, or other strategic partnerships will be most affected by the CTA requirements.
Whose Information is Reported
If a company is determined to be a Reporting Company under the CTA, the company’s “Beneficial Owners” must be identified and their information reported by the Reporting Company to FinCEN. The Act defines a Beneficial Owner of a Reporting Company as any natural person who directly or indirectly (i) exercises “substantial control” over the Reporting Company or (ii) owns or controls 25% or more of the ownership interests of the Reporting Company.
Individuals with “Substantial Control” over a Reporting Company include those who (i) serve as managers or senior officers, such as a president, CEO, or CFO, (ii) have the right to appoint a majority of the board of directors or similar governing body, or (iii) otherwise have substantial influence over important decisions made by the Reporting Company (which may be in the form of contractual rights).
Determining whether a Beneficial Owner owns or controls 25% or more of the ownership interests in the Reporting Company takes direct and indirect ownership into account, and treats options, convertible instruments, and similar equity rights as being exercised. This determination may be simple for some businesses and very complex in other business structures. Ultimately, the ownership test will require Reporting Companies to go “up the chain” of their organizational structures to determine their individual Beneficial Owners. Although under current law, most trusts are not Reporting Companies, trusts that are Beneficial Owners of a Reporting Company will be required to provide Beneficial Ownership Information on their Beneficial Owners to the Reporting Company to enable it to make its report to FinCEN. For trusts, that could include the trustees, beneficiaries, and grantors or settlors (and possibly trust protectors and trustee advisers).
For new entities formed on or after January 1, 2024, in addition to information about Beneficial Owners, the CTA will require certain information to be filed regarding up to two “Company Applicants” of a Reporting Company: (i) a “Company Filer” and (ii) the individual from the Reporting Company who directs the Company Filer. A Company Filer is the individual who directly files the document that creates the Reporting Company (or registers the entity to do business), such as an attorney, paralegal, or an employee at a business formation service.
What Information is Reported
Under the CTA, Reporting Companies are required to report the entity’s:
- full legal name;
- trade names or d/b/a names;
- principal place of business (or, in the case of a foreign Reporting Company, its primary location in the United States);
- State or foreign jurisdiction of formation (and in the case of a foreign Reporting Company, the State where it first registered); and
- unique taxpayer ID number.
The Reporting Company must also disclose for each Beneficial Owner and Company Applicant:
- full legal name;
- date of birth;
- current address (residential for Beneficial Owners, and business for Company Applicants);
- unique identifying number from an acceptable identification document (e.g., driver’s license or passport); and
- a copy of the above acceptable identification document.
The information provided to FinCEN is intended to be confidential and protected via a secure, non-public database typically used by the federal government to protect non-classified yet sensitive information. However, FinCEN will permit federal, state, and local officials (as well as certain foreign officials who submit a request through a U.S. federal government agency), to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement. Financial institutions will also have access to beneficial ownership information in certain circumstances, with the consent of the Reporting Company. Those financial institutions’ regulators will have access to beneficial ownership information when they supervise the financial institutions.
Changes of any Beneficial Owner of a Reporting Company or to any information about a Beneficial Owner – for example, changes caused by the sale of the business, receipt of a new investment, or name or address change for a Beneficial Owner – require the Reporting Company to file an updated report with FinCEN within 30 days.
How to Report
FinCen is still developing a secure online portal through which it will accept Beneficial Ownership Information, which portal is scheduled to launch on January 1, 2024. Instructions and other guidance regarding Beneficial Ownership information reports will be made available at www.fincen.gov/boi.
Deadlines
As noted above, Reporting Companies newly formed or registered to do business in the United States on or after January 1, 2024, must submit Beneficial Ownership Information within 90 days of such formation or registration. However, after January 1, 2025, new Reporting Companies will only have 30 days to submit such information. Reporting Companies formed or registered to do business in the U.S. prior to January 1, 2024, have one year, until January 1, 2025, within which to submit Beneficial Ownership Information.
Considerations for Investment Managers
SEC-registered investment advisers and venture capital advisers, their respective wholly-owned subsidiaries and the private funds they advise, are exempt and not required to file Beneficial Ownership Information reports, however the non-U.S. funds they advise that are registered to do business in the United States are subject to limited reporting. Certain other investment advisers (e.g., exempt reporting advisers other than venture capital advisers and state-registered advisers) are considered Reporting Companies and are thereby, required to file Beneficial Ownership Information reports for themselves, as well as the private funds they advise. Additionally, depending on structuring, general partners, holding companies and/or other affiliated entities may be required to file Beneficial Ownership Information reports.
Risks and Penalties
Reporting violations can lead both to civil and criminal penalties. The CTA states that it is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent Beneficial Ownership Information or to willfully fail to report complete or updated Beneficial Ownership Information. Such a violation caries a civil penalty of up to $500 per day, a fine of not more than $10,000, and/or imprisonment for up to two years.
Next Steps
Seward & Kissel can help you navigate this new law and its compliance obligations. We will share more information on the CTA and reporting requirements as these become available. If you have any questions, please reach out to your Seward & Kissel relationship attorney or a member of the S&K Corporate Transparency Act Committee. In the meantime, impacted individuals or organizations should begin collecting information on any entities created, owned, or over which substantial control is exercised, which entity may be subject to the new reporting requirements.
Exemptions
The following includes a complete list of CTA exempt entities:
| Exemption | Description |
| Securities reporting issuer | Any issuer of securities that is: (A) an issuer of a class of securities registered under Sec. 12 of the Securities Exchange Act of 1934, or (B) required to file supplementary and periodic information under Sec. 15(d) of the Securities Exchange Act of 1934. |
| Governmental authority | Any entity that: (A) is established under the laws of the United States, an Indian tribe, a State, or a political subdivision of a State, or under an interstate compact between two or more States, and (B) exercises governmental authority on behalf of the United States or any such Indian tribe, State, or political subdivision. |
| Bank | Any bank, as defined in: (A) Sec. 3 of the Federal Deposit Insurance Act, (B) Sec. 2(a) of the Investment Company Act of 1940, or (C) Sec. 202(a) of the Investment Advisers Act of 1940. |
| Credit union | Any Federal credit union or State credit union, as defined in Sec. 101 of the Federal Credit Union Act. |
| Depository institution holding company | Any bank holding company as defined in Sec. 2 of the Bank Holding Company Act of 1956, or any savings and loan holding company as defined in Sec. 10(a) of the Home Owners’ Loan Act. |
| Money services business | Any money transmitting business registered with FinCEN under 31 U.S.C. 5330, and any money services business registered with FinCEN under 31 CFR 1022.380. |
| Broker or dealer in securities | Any broker or dealer, as those terms are defined in Sec. 3 of the Securities Exchange Act of 1934, that is registered under Sec. 15 of that Act. |
| Securities exchange or clearing company | Any exchange or clearing agency, as those terms are defined in Sec. 3 of the Securities Exchange Act of 1934, that is registered under Secs. 6 or 17A of that Act. |
| Other Exchange Act registered entity | Any entity other than that described in exemption 1 (Securities reporting issuer), exemption 7 (Broker or dealer in securities), or exemption 8 (Securities exchange or clearing agency) that is registered with the SEC under the Securities Exchange Act of 1934. |
| Investment company or registered investment adviser | Any entity that is: (A) an investment company as defined in Sec. 3 of the Investment Company Act of 1940 or is an investment adviser as defined in Sec. 202 of the Investment Advisers Act of 1940, and (B) registered with the SEC under the Investment Company Act of 1940 or the Investment Advisers Act of 1940. |
| Venture capital fund adviser | Any investment adviser that: (A) is described in section 203(l) of the Investment Advisers Act of 1940, and (B) has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the SEC. |
| Insurance company | Any insurance company as defined in Sec. 2 of the Investment Company Act of 1940. |
| Commodity Exchange Act registered entity | Any entity that: (A) is a registered entity as defined in Sec. 1a of the Commodity Exchange Act, or (B) is: (1) a futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor, each as defined in Sec. 1a of the Commodity Exchange Act, or a retail foreign exchange dealer as described in Sec. 2(c)(2)(B) of the Commodity Exchange Act and (2) registered with the Commodity Futures Trading Commission under the Commodity Exchange Act. |
| Accounting firm | Any public accounting firm registered in accordance with Sec. 102 of the Sarbanes-Oxley Act of 2002. |
| Public utility | Any entity that is a regulated public utility as defined in 26 USC 7701(a)(33)(A) that provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States. |
| Financial market utility | Any financial market utility designated by the Financial Stability Oversight Council under Sec. 804 of the Payment, Clearing, and Settlement Supervision Act of 2010. |
| Pooled investment vehicle | Any pooled investment vehicle that is operated or advised by a bank, credit union, broker/dealer in securities, investment company/investment adviser, or venture capital fund adviser. Please note that if the pooled investment vehicle is foreign, it will still have to report information about an individual who exercises substantial control over the entity. |
| Tax-exempt entity | Any entity that is: (A) an organization that is described in Sec. 501(c) of the Internal Revenue Code of 1986 (determined without regard to Sec. 508(a) of the Code) and exempt from tax under Sec. 501(a) of the Code, except that in the case of any such organization that ceases to be described in Sec. 501(c) and exempt from tax under Sec. 501(a), such organization shall be considered to continue to be described as a tax-exempt entity for the 180-day period beginning on the date of the loss of such tax-exempt status, (B) a political organization, as defined in Sec. 527(e)(1) of the Code, that is exempt from tax under Sec. 527(a) of the Code, or (C) a trust described in paragraph (1) or (2) of Sec. 4947(a) of the Code. |
| Entity assisting a tax-exempt entity | Any entity that: (A) operates exclusively to provide financial assistance to, or hold governance rights over, any entity described in exemption 19 above (tax-exempt entity), (B) is a United States person, (C) is beneficially owned or controlled exclusively by one or more United States persons that are United States citizens or lawfully admitted for permanent residence, and (D) derives at least a majority of its funding or revenue from one or more United States persons that are United States citizens or lawfully admitted for permanent residence. |
| Large operating company | Company with more than 20 full time U.S. employees, sales, or profits above $5 million, and a presence in the United States. |
| Subsidiary of certain exempt entities | Any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities described in exemptions; SPVs and AIVs will generally be considered covered entities, but may be exempt based on ownership interests. |
| Inactive entity | Any entity that: (A) was in existence on or before January 1, 2020, (B) is not engaged in active business, (C) is not owned by a foreign person, whether directly or indirectly, wholly or partially, (D) has not experienced any change in ownership in the preceding twelve-month period, (E) has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12 month period, and (F) does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity. |
